In 2005, how to align your money with your values

January 24, 2005

Hydrogen cars will become viable investments. Some ethical investing is elitist. Parts of the corporate-reform movement are dead. Those are a few of the strong positions taken by the Monitor's second annual ethical-investing panel. The panel, looking ahead to 2005, was cautious about the overall market. But some areas, such as environmentally friendly stocks, hold promise.

Ethical investing is not just about profit, it's about changing the world. One panelist introduced a new avenue for doing that: venture philanthropy, which brings business discipline to the nonprofit world. The panelists - (top to bottom) Anita Green, vice president of social research at Pax World Funds; Charles Harper, executive director of the John Templeton Foundation, and Jack Robinson, president of Winslow Management - talked with a Monitor editor and writer Jan. 18. Here's some of what they shared:

What's the 2005 outlook for ethical investors?

Jack Robinson: I think there are two broad categories: One is the overall investment climate, which is going to be relatively difficult in the face of rising interest rates, rising inflation, and other issues we are dealing with, such as terrorism and higher oil prices. But against ... that backdrop in terms of ethical investing - and keep in mind that our primary focus is on the environmental side of things - we, frankly, feel there are more opportunities today than there ever have been in the 12 to 14 years that we've been at this. That has to do with lots of new opportunities in various "green" investment areas that are being pursued by relatively new start-up companies and also companies that are relatively young in the scheme of things.

Anita Green: One of the things that [investors] may see are changes in their portfolios due to increased defense spending. More companies are showing up as having weapons contracts. The tech sector is especially vulnerable to this. But it may not be that they are actually engaged in weapons; it may be simply that the Department of Defense is buying the same technology that you or I can buy off the shelf. In the area of environment, this is a good news/bad news [scenario] for investors. Companies are now being asked and they are starting to evaluate their risk - their financial risk - with regard to climate change. The insurance companies are also issuing some statements on this, and investors are engaging companies in dialogue around this issue. The bad news is that under this administration, what we've seen in the first four years is a rollback on environmental regulation. And there's no reason to think that that won't continue.

Charles Harper: It's part of a movement to encourage people in philanthropy to think like businesspeople about what is innovation, what is efficiency, what is yield on philanthropic investment ... as opposed to the old check-writing philanthropy. A venture capitalist looks for a better idea. So venture philanthropy is looking for new ideas, innovations, and a way to bring philanthropic capital to bear to change the world.

One thing that's puzzling about the socially responsible investment community is that there's essentially nothing done in terms of hedging portfolios against decline.

Robinson: You're absolutely right. One of our clients, four or five years ago, [asked]: "Why don't you go long on greens [environmentally friendly companies] and short the dirties [egregious polluters]?" So we created a hedge fund about three years ago to start testing this basic concept. It's taken us three years of some significant mistakes, but some wonderful wins, and we really feel that this is a product that makes a lot of sense. Now, it's not a registered product, so it's not something that we can sell actively, particularly to sophisticated investors, but it was a product that was developed with one of our biggest clients in mind.

Have corporations improved auditing and oversight in light of Enron and other scandals?

Green: In 2004, the socially responsible investment community gained considerable ground in the regulatory front. Now we are starting to see a little bit of push-back. And in 2005, we may have a couple of things taken away. The petition to allow shareholders to nominate candidates for the board of directors is losing steam rapidly and is likely dead. Another one would be the regulation that came out for an independent chair on the board - it's very likely that that will be repealed. But I don't think it will take away the things that are really the meat of the disclosure movement.

If an ethical investor wanted to give $1,000 for long-term aid to the very poor, where should she look?

Harper: Unfortunately, you can't do very much with $1,000. But you can pool resources, and there are new philanthropic instruments [for that]. One of the greatest successes of recent years, and really a worthy investment for people wanting to make a difference at the level of $1,000 is microfinance. Microfinance started out as a philanthropic activity. Church groups used to do it and now VISA is doing it. Major banks, MBNA, there's thousands. Microfinance is the tip of the iceberg for the development of business among the poor in places like India, huge markets in China - we're talking a billion people - and as those people emerge from poverty into the middle class, they will be big consumers, they will want to buy a lot of stuff.

Is the fuel-cell car coming?

Robinson: Absolutely. It wasn't too many years ago when most of the consumers - and even more on the industrial side - were saying that there would be no space for a hybrid. Today the Prius has become a profitable car for Toyota. The Prius chassis has been developed so that you can convert it very easily to a fuel-cell automobile. By no means is that economical yet. There will have to be a lot more demand and a much improved technology.

Harper: There's an illusion, a scientific illusion here, that these cars are cleaner. They're cleaner in terms of what comes out of the tailpipe; what comes out of the tailpipe is water vapor. But the power has to be created. Fuel-cell economies are [mostly] based on breaking down hydrocarbons, so the source of the power is very similar to burning hydrocarbons. In fact, they may well be less efficient. So, one has to look at the details. So-called ethical investing involves many of these self-deceptions.

A self-deception?

Robinson: Charles is right. Current technology is using primarily fossil fuel-driven electricity generation [to create the hydrogen]. But I think there are other ways to generate power, such as wind, solar, and biomass. And if, indeed, you are in favor of nuclear, that could be used to do the same thing. So, we're early on in the technology.

Does Pax invest in bad companies - however you describe those - in order to force them to do better?

Green: No. You will not see us investing in an ExxonMobil for the purpose of engaging them in dialogue. They have to pass the screening process. Once they get in, however, issues will arise. News pops up all the time. Lawsuits may be filed, spills may happen, and in that case, we will engage management in dialogue, and so we will participate that way.

Two years ago, after we made an investment in Dell, there was a socially responsible investor that had started a dialogue with Dell on[recycling, and so we joined in on this. And, they now have what's called 'design for the environment.' They're redesigning their product so that when they are done with the product, it can be recycled.

Harper: The very concept of ethical investing rubs me a little bit the wrong way, because of the kind of elitist aspect that it presumes.

Ordinary investing is itself profoundly ethical. Probably the most effective way for people to solve the world's most pressing problems - that is, where people live in the extremities - is not necessarily through philanthropy, but through promoting the flourishing business in impoverished cultures. After all, the insight that we typically lack in the United States can be summarized in a Chinese proverb that says, "If you want to know where water is, don't ask the fish." If you want to know what the solution of poverty is, don't ask an American, because we live in the solution to poverty.

It doesn't matter whether people invest in Lockheed Martin or Whole Foods?

Harper: Let me give you a more finely balanced example. Investing in nuclear power is probably one of the greenest agendas you can pursue. But I pretty much doubt that people will do that, even though it's logical and ethical by the power of its logic. Because for these communities of so-called ethical investors, nuclear power is a bad thing.

Green: Our problem is not with the generation of nuclear power, because from a cleanliness standpoint, that's the cleanest form of energy that can be generated. The difficulty is with the waste that is produced and the fact that we have no effective long-term way to deal with it except to bury it underground.

Harper: People always say that there's a problem with storing nuclear waste, and this is not a trivial issue, of course. But this morning I got on an airplane in Philadelphia and flew to Boston. The technological challenge of flying me from Philadelphia to Boston is much more complicated and serious than the technological problem of storing nuclear waste. There's more nuclear waste in the granite of Yosemite National Park than can ever be created by US nuclear power stations.

Is ethical investing elitest?

There are more ordinary - and a little less politicized - [unethical things] than global warming and environmentalism. Gambling and Hollywood [for example] have disproportionate impacts on poor people - people at the bottom - particularly Hollywood. It gives people a vision of life, a way of thinking, a way of looking at the world, that's antithetical to their success in many ways. However you look at it - whether it's locking them into sexual license, whether it's locking them into a vision of cynicism, or whether it's locking them into a materialism where they think that's the way to be human - the way to succeed is to have all this expensive stuff that you have to buy, some sort of ticket to the rat race.

Is there any move in the socially responsible community to examine the effects of Hollywood?

Green: Yes, the conversations have been there for quite some time, and in varying forms. There is a group of professionals engaged in corporate dialogue over the content of media. And that includes video games - violent video games - [and] movies.

Charles's comments on gambling are absolutely right. There's a fascinating study that was done on states that had enacted a lottery, and the long-term financial, or economic, impacts on those states. It's the poor people, it's the ones who can't afford it, who are taking the grocery money and using that to play the lottery. And when you look at state budgets, they're counting on this money to come in. So then they have to find ways to get people to pay more to play the lottery. Unfortunately, it's a negative spiral, and it's one that you very rarely hear about.

What opportunities do you see going forward?

Robinson: There are broad categories such as healthy living, which would include natural and organic foods, the largest of which is Whole Foods. That category is a $20 billion space that is filled with relatively new companies, all of which have relatively small capitalizations and tend to be more growth-oriented than anything else. Another major category would be alternative and renewable energy. We think this is a space that has reached its point of inflection. Not only is demand rising but the technologies have become more economical.

Green: Socially responsible investors in 2005 will see increased market share. Even during the first three years of this decade, when the market was doing so terribly, the socially responsible funds saw new money coming in, and they saw that the investors that they already had stayed with them. I think that will continue. People are expressing a lot of confidence in socially responsible investments. They are long-term investors. They choose their investments carefully before they make them, and then they stick with them.

• For further discussion, tune in to the Monitor's webcast of the panel's presentation at The Mary Baker Eddy Library.